Why is Bitcoin rising? - Bitfinex blog
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Why is Bitcoin rising?

The recent introduction of Bitcoin Exchange-Traded Funds (ETFs) has injected a new dynamic into the cryptocurrency market, particularly evident in the remarkable surge in trading volumes witnessed this week. Retail traders, in particular, are using these ETFs to tap into Bitcoin’s ongoing rally, which saw the cryptocurrency breach the $60,000 mark for the first time since November 2021.

The New Bitcoin ETFs Seem to Have an Insatiable Demand for BTC

The iShares Bitcoin Trust (IBIT) and Fidelity Wise Origin Bitcoin Fund (FBTC), among others, have recorded trading volumes that far exceeded expectations, demonstrating robust demand from investors looking to participate in Bitcoin’s price movements indirectly through regulated financial products.

The spike in trading volumes of Bitcoin ETFs like IBIT and FBTC underscores a significant retail interest in cryptocurrency investments, facilitated by the convenience and regulatory compliance of ETFs. With IBIT’s trading volume more than doubling its previous high and FBTC also setting new records, it’s clear that these financial instruments are becoming a preferred avenue for retail traders to gain exposure to Bitcoin’s price action. The ETFs’ performance, closely mirroring Bitcoin’s price trajectory, has not only validated their tracking efficiency but also highlighted the growing appetite among investors for cryptocurrency-related products.

The enthusiasm for Bitcoin ETFs and their contribution to the cryptocurrency’s bullish price pressure is also reflected in the overall increase in the market valuation of these funds. As Bitcoin’s value has ascended approximately 30% since the ETFs’ approval, the funds themselves have seen a corresponding uptick in their price, culminating in a significant jump this week. 

Not all Bitcoin funds have paralleled this trend, as evidenced by the consistent outflows seen in the Grayscale Bitcoin Trust (GBTC), as investors move away from the higher fees charged by GBTC and move to cheaper counterparts. However, the overarching narrative remains one of a marked bullish sentiment towards Bitcoin. These funds have not only democratised access to Bitcoin investments but have also added a layer of bullish price pressure by channelling new capital into the market, reinforcing Bitcoin’s upward price trajectory amidst growing mainstream acceptance.

The Upcoming Halving is Adding Fuel to the Fire

The upcoming Bitcoin halving event, estimated to take place in April, is further amplifying the bullish sentiment surrounding Bitcoin, adding an additional layer of excitement to the cryptocurrency market. Bitcoin halvings, which occur approximately every four years, reduce the reward for mining new blocks by half. This event effectively diminishes the rate at which new Bitcoins are generated and introduced into circulation, acting as a counter-inflationary mechanism by design. As past halvings have historically preceded significant bull runs in Bitcoin’s price, investors and market spectators alike are eyeing the upcoming halving with optimistic expectations, contributing to the prevailing bullish sentiment.

The principle behind the halving’s impact on Bitcoin’s price is fundamentally tied to the economics of supply and demand. By halving the block reward, the rate of new supply entering the market slows down, while demand, assumed constant or increasing, begins to outstrip the slowing supply. This scarcity effect has been a key driver behind the price surges following previous halvings. Given the increased mainstream adoption of Bitcoin and broader institutional interest compared to previous cycles, the April halving is particularly notable. Investors are speculating that the reduced supply growth could lead to a sharp uptick in Bitcoin’s price, especially as more investors and institutions view it as a digital store of value.

Moreover, the halving event is not only a technical milestone but also a psychological one, reinforcing Bitcoin’s value proposition as a deflationary asset. In the context of global economic uncertainty and inflationary pressures in fiat currencies, Bitcoin’s halving serves as a reminder of its designed scarcity and potential as a hedge against inflation. This narrative resonates with both individual and institutional investors, driving positive sentiment and speculative demand ahead of the halving.

During the Bear Market, the Builders Were Building

The Bitcoin landscape is also witnessing a transformative phase with the advent of new technological innovations such as Ordinals, Stamps, BRC-20 tokens, and a suite of Layer 2 protocols including the Lightning Network, Mercury Layer, Chaumian E-Cash, the Liquid Network, and Rollups. These developments are not only enhancing Bitcoin’s utility and scalability but are also significantly contributing to the bullish sentiment surrounding Bitcoin. By addressing some of the challenges such as transaction speed, cost, and scalability, these technologies are expanding the potential use cases for Bitcoin, moving it beyond a store of value to a more versatile digital asset.

Ordinals and Stamps have introduced a novel way of embedding data within Bitcoin transactions, enabling the creation of non-fungible tokens (NFTs) and other digital artefacts directly on the Bitcoin blockchain. This innovation has opened up new avenues for artists, creators, and developers to explore Bitcoin as a platform for digital ownership and asset creation, thereby attracting a new audience to the Bitcoin ecosystem. The ability to mint NFTs on Bitcoin’s blockchain adds a layer of utility and value to the network, further solidifying its position in the competitive crypto space.

On the financial side, the introduction of BRC-20 tokens is set to revolutionise Bitcoin’s utility by enabling the creation of tokenized assets and smart contracts on the Bitcoin network. This move towards DeFi (Decentralised Finance) on Bitcoin’s blockchain could unlock immense value, making Bitcoin a more attractive investment beyond its traditional role. Coupled with Layer 2 solutions like the Lightning Network, which facilitates instant and low-cost transactions, Bitcoin is becoming more accessible and practical for everyday transactions and micro-payments, broadening its appeal and use cases.

Moreover, Layer 2 protocols such as Lightning Network, Mercury Layer, Chaumian E-Cash like Cashu and Fedimint, the Liquid Network, and Rollups are addressing Bitcoin’s scalability challenges head-on. By enabling faster, more efficient transactions and expanding Bitcoin’s capacity, these protocols are laying the groundwork for a more robust and scalable blockchain infrastructure. The promise of enhanced privacy, increased transaction throughput, and reduced fees is making Bitcoin an even more compelling choice for both users and developers. As these technologies continue to evolve and gain adoption, they are likely to drive further innovation and investment in the Bitcoin ecosystem, reinforcing the bullish sentiment and vision for Bitcoin’s future.

Future Outlook

In conclusion, the launch of the ETFs is just one part of the equation underpinning a bullish case for Bitcoin. The anticipation of the upcoming Bitcoin halving in April, which underlines the scarcity of the asset, is also driving demand. While the developers and open-source advocates are providing the basis for increased utility and value for Bitcoin, which suggests that the full valuation of Bitcoin is still some way from being realised.